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Best Practices: NEW SBA Change of Ownership Rules

by Ethan W. Smith

On July 1, 2013, SBA released a revision to SOP 50 10 5(E) that revised and clarified SBA’s requirements for financing change of ownership transactions with SBA guaranteed loans. Prior to this revision, SBA had restricted SBA financing for change of ownership transactions that were structured as stock purchases where the stock (or ownership interest) of the selling shareholder(s) was being purchased by an individual or individuals. The new rules lift this restriction and greatly simplify the requirements governing change of ownership transactions for SBA lenders.

The new guidelines allow for a change of ownership to be achieved through an asset purchase, a stock purchase or a stock redemption[1]. The revised language of the SOP provides for two basic scenarios in which a change of ownership can occur: (1) a change of ownership between existing owners; and (2) a change of ownership that results in a “new” owner.

A change of ownership between existing owners may be accomplished either through a stock purchase or a stock redemption. Whether structured as a purchase or redemption, the remaining owners must own 100% of the stock at the completion of the transaction. If structured as a purchase, the individuals acquiring the stock, and the company whose stock is being acquired, must be co-borrowers on the loan. If structured as a redemption, the business whose stock is being redeemed must be the borrower and the remaining owners may be either co-borrowers or guarantors.

A change of ownership resulting in a new owner may be structured as either a stock purchase or an asset purchase. If structured as a stock purchase, 100% of the stock may be purchased either by an entity or an individual who is not an existing owner of the business. If the purchaser of the stock is an individual, then the individual and the target must be co-borrowers on the loan. If the purchaser of the stock is an entity or if the transaction is structured as an asset purchase, then the business being acquired may be a co-borrower on the loan. Generally, lenders should consider making the target business a co-borrower when the transaction is structured as a stock purchase, but it is unlikely that a seller in an asset purchase would ever consent to being obligated on the purchaser’s loan. As the SBA’s language is not mandatory, this should not present any structuring issues for lenders.

Lenders must also ensure that the business will not attempt to deny liability for lack of consideration on debts where it is a co-borrower with the purchasers of the stock. As this analysis varies by state, lenders should consult counsel to ensure the enforceability of the loan documents. If the borrower denies liability on these grounds, the SBA may not honor the guaranty.

The amendments to the change of ownership provisions of the SOP 50 10 5(E) should facilitate change of ownership transactions financed with SBA loans, especially those structured as stock purchases. However, lenders should be mindful of the SBA’s new requirements to ensure that they do not jeopardize the guaranty. For more information on SBA’s new change of ownership guidelines, contact Ethan at esmith@starfieldsmith.com or at 215.542.7070.

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[1] For purposes of this article, all purchases or redemptions of the ownership interest of an entity will be referred to as “stock” transactions, acknowledging that the particular facts of a transaction may require a transfer of membership interest, partnership interest, or other interest that is not technically “stock”.